Debunking the SUV credit myth
A tax break is available, but it’s not as lucrative as hyped

The sales pitch goes like this: Buy a $50,000 SUV and Uncle Sam will give you $25,000 back! Often referred to as the SUV credit, this urban legend deserves some explaining.

First, it’s important to understand that the much-touted benefit is not a credit but a deduction. A credit is a dollar-for-dollar savings on what you owe Uncle Sam. A deduction is a reduction in your taxable income. With the SUV deduction, you can reduce the amount of income you pay taxes on by a portion of the cost of your new SUV.

The deduction’s origins date to 2003, when Congress included SUVs in an existing tax deduction of up to $102,000 for people who bought vehicles weighing more than 6,000 pounds for their business. The deduction was intended to help farmers and construction workers who need heavy vehicles in their work.

In 2004, the deduction was revised as part of the American Jobs Creation Act. The tax code now allows buyers of vehicles of between 6,000 and 14,000 pounds to take a $25,000 deduction and immediately depreciate half of the remaining sales price.

Both the deduction and the depreciation are subtracted from the buyer’s taxable income. On top of that, owners can depreciate whatever is left after the first two reductions, thereby reducing their taxable income three times in one year for the purchase of one asset.

After the deduction became law in 2003, all kinds of individuals who relied on automobiles in their work—real estate agents, doctors with multiple offices, sales representatives—began buying SUVs. The attraction was obvious: The tax deduction for lighter cars was a mere $7,660, a fraction of the deduction for SUVs.

Tax breaks for everyone!
SUV dealers have used the deduction as a sales lure, which has led many to believe that anybody who buys a big, heavy, gas guzzling automobile can get the government to help foot the bill. But, in fact, the deduction is only for those who use the vehicle for business at least 50 percent of the time. And it is not a tax credit, which offsets your tax bill dollar-for-dollar. Moreover, only a fraction of the deduction actually translates into dollars saved.

Doing the math
Here’s the breakdown on the SUV deduction: Let’s say you are a business owner and you buy a $50,000 SUV. First, you can take a deduction for $25,000 right off the top. Then you get to depreciate half the remaining balance of $25,000 because of a special, “bonus” depreciation that comes with this kind of vehicle. That comes to $12,500. So far, you have a $37,000 deduction. Now take regular depreciation, 20 percent, on what’s left--$12,500. That comes out to $2,500. All told, you have a $40,000 deduction.

However, that $40,000 deduction doesn’t mean saving $40,000 on your taxes. You calculate your actual savings by multiplying the $40,000 deduction by your marginal tax rate. So, if your tax rate is 25 percent, the actual savings on your SUV is 25 percent of $40,000 or $10,000.

That is still a nice sum of money. But ultimately, the question is whether you really need that much machine. In recent years, the price of gasoline has risen dramatically. Heavy vehicles are much less fuel efficient than their lighter counterparts. As a result, the cost of keeping the tank full may eventually eat away at the savings gained from the initial deduction.

Many SUV’s, for example, get only about 13 miles to the gallon. Most people put about 15,000 miles on a car every year. At $2 for a gallon of gas, that means you’ll spend around $2,300 in gasoline this year. Someone who drives a more efficient car that gets, say, 30 miles to the gallon, will spend only about $1,000 in gas. So while there are some definite tax benefits to buying an SUV, the idea of paying only pennies on the dollar for such a vehicle is off the mark.

“Owners of SUVs who use them for work do enjoy some potentially higher tax benefits than, say, owners of a sedan,” says Kathy Burlison, director of tax implementation for H&R Block. “But that may or may not make up for the cost in gasoline. You can save, but certainly not as much as some have purported. It’s a deduction, not a credit. And that’s a significant difference.”

For more information, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses and Publication 946, How to Depreciate Property.